Davos – an exercise in denial not solutions

Most of the failed political leaders and their corporate mates are in Switzerland at the moment, presumably wining and dining in fine style and pontificating about what the rest of this need to do next. The sheer preposterousness of the World Economic Forum in Davos is astounding. There remains a denial by the leaders of what has to be done. They seem insistent that the failed neo-liberal paradigm should remain intact. Apparently, calls for reforms just reflect an unrealistic nostalgia for the past. It is apparently nostalgic (meaning nonsensical) for us to long for the days when nations delivered full employment, real wages growth in line with productivity, and declining inequality. This accusation of nostalgic longing is the way the elites are avoiding facing the facts that their economic model based upon self-regulating markets has failed and will never deliver on its promises. We need a new approach that recognises the capacities and options available to a currency-issuing national government. This is not a nostalgic longing for an unchanged world. Rather it is a realisation that the macroeconomic fundamentals of a currency-issuing national state have not changed, notwithstanding the challenges that globalisation presents.
In the middle of the 18th century, Davos began to offer medical services to the rich which aimed at providing cures for a number of illnesses, especially tuberculosis. For more than 100 years, the particular micro-climate up in the high valleys of Switzerland was seen to be an excellent environment for the recovery from urban-related (pollution-based) diseases.

In the Second World War, even though Switzerland claimed itself to be neutral, German and Italian Nazis often gathered in Davos.

It seems that Davos is still keen to play host to anti-Democratic forces.

That would presume that the gathering at Davos had some answers. The reality is that the utterances that are coming out already suggest more of the same failed models. World leaders are entranced with neo-liberalism and until they become free of the rapture there will be no change of direction.

The journalist, Larry Elliot also noted that while everybody realises that the political solutions in Europe are failing:

What there isn’t, is a plan for getting out of the mess, or even much of a desire on the part of those doing very nicely out of the current system to start drafting one.

I would exclude Chicago economists from the collective “everybody”. They are in a world of their own and still believe the free market is working.

It is still too early to consider some of the published material surrounding the World Economic Forum. However, there have been some interesting statements already made by some of the world leaders.

I was interested in the comments made by the Dutch businessman Ben Verwaayen in one of the opening sessions at Davos. He said that our roles as both consumers and citizens were often at odds with each other.

He gave the example of the consumer coming out of a shop with a bag full of “globalisation” (that is, imported goods) but then complaining as a citizen to the government to be protected from the consequences of globalisation – the unemployment and lost incomes.

That irony extends to many aspects of our life. On the way to work today, I noticed many cars sporting various-sized Australian flags. There is no surprise because today is a public holiday celebrating Australia Day or as the indigenous population prefer to think of it Invasion Day.

At present there is growing popular resentment over the loss of jobs in manufacturing in Australia as a result of increased import competition (especially as the exchange rate has risen so significantly in the last year or more given the record terms of trade in primary commodities).

There are increasing calls for more government assistance to save the jobs as a nationalistic gesture – we are constantly being told that Australia needs a manufacturing sector.

Of-course, these calls are despite the fact that imported cars are now outstripping locally-made cars in terms of sales.

In terms of the flags, the irony of-course, is that most, if not all, of them will have been bought in the cheap shops are proliferating throughout Australia selling goods at rock-bottom prices that come from China.

At Davos, Verwaayen then claimed that the concept of a nation was disappearing and being replaced by direct relationships between local regions and global markets. He claimed that problem with this is that policymakers are still operating as if there was a national prerogative that policy could service.

This is a popular neo-liberal narrative and provides the literature which is known as “new regionalism”.

New regionalism became popular as part of the so-called Third Way movement in Britain and Europe in the 1990s and beyond. Concepts such as social entrepreneurship and new regionalism emerged as the governments embraced the so-called Third Way – neither free market (right) or government regulation (left) – as a way to resolve unemployment and regional disadvantage.

The Third Way movement included new ideas about space – that is, the global, national and local regional layers which still rely on individualistic and market-based constructs inherent in neo-liberalism.

Unemployent is still rendered as an individual problem – the ultimate “privatisation”.

New Regionalism proposes a series of “solutions” or separate policy agendas that build on these individualistic explanations for unemployment and accepts the litany of myths used to justify the damaging macroeconomic policy stances that are now the norm in Europe and beyond.

By failing to ask the correct questions, these “solutions” then appear, on first blush, to have (undeserved) plausibility.

New Regionalism emerged in the mid-1980s and was largely driven by case studies documenting economic successes in California (Silicon Valley) and some European regions (such as Baden Württemberg and Emilia Romagna).

The interlinked ideas that define this approach to “space” are consistent with Ben Verwaayen’s characterisation that the “national” level is now getting in the way of development.

New Regionalism claims that “the region” is now the “crucible” (to use the words of British regional scientist John Lovering) of economic development and should be the prime focus of economic policy.

In this way, the claim is that regions have now usurped the nation state as the “sites of successful economic organisation” (Scott and Storper’s words) because supply chains (in the post Fordist era) have become more specialised and flexible given the need to deal with uncertain demand conditions.

New Regionalism advocates argue that regional spaces provide the best platform to achieve flexible economies of scope that are required to adjust to increasingly unstable markets.

These dynamics require firms to locate in clusters, often grouped by new associational typologies (for example, the use of creative talent or untraded flows of tacit knowledge) rather than by a traditional economic sector such as steel.

The new post-Fordist production modes emphasise new knowledge-intensive activities encouraging local participative systems. By achieving critical mass of local collaborators, a region could be dynamic and globally competitive.

Most these claims are based on induction of regional “successes” without regard for the specific cultural or institutional contexts, and lack any coherent unifying theoretical underpinning.

It is highly disputable whether the empirical examples advanced to justify the claims made by New Regionalist proponents actually represent valid evidence at all.

For example, John Lovering (1999: 382) examined the claimed made in the 1990s about Wales and concluded:

If one factor has to be singled out as the key influence on Wales’ recent economic development … it is not foreign investment, the new-found flexibility of the labour force, the development of clusters and networks of interdependencies or any of the other features so often seized upon as an indication that the Welsh economy has successfully ‘globalized’. Something else has been at work which is more important than any of these, and it is a something which is almost entirely ignored in New Regionalist thought … It is the national (British) state.

[Reference: Lovering, J. (1999) ‘Theory led by policy: the inadequacies of the New Regionalism’, International Journal of Urban and Regional Research, 23, 379-395]

That is, a supportive macroeconomic policy framework.

While many criticisms can be levelled at New Regionalism, its major weakness is that perpetuates the notion that regions can entirely escape the vicissitudes of the national business cycle through reliance on a combination of foreign direct investment and export revenue.

It is a different spin (a variation) on the “business cycle is dead” notion and amounts to a denial that macroeconomic policy – that is, at the national level – can be an effective response to global trends that penetrate via the supply chains defined by trade patterns to the local region.

New Regionalism thus supports neo-liberal claims that fiscal and monetary policy is impotent and, in turn, it constructs mass unemployment as an individual phenomenon.

By ignoring the fact that mass unemployment demonstrates the unwillingness of the central government to spend sufficient amounts of currency given the non-government sector’s propensity to save, the neo-liberal position is left unchallenged and is actually reinforced and a new style of Says Law emerges with claims that post-Fordist economies need to focus on “supply-side architectures”.

Modern Monetary Theory (MMT) provides us with a way of understanding that currency-issuing monopoly embedded in the national state is still powerful and can be used to advance domestic prosperity independent of the way in which global changes manifest.

That is not to say that these major changes in supply chains and changes in the pattern of energy demand etc are not major events which are forcing national economies to adapt. That clearly is the case and I have written about it at length.

But even with the pressure of these changes, the national state remains relevant.

The reason why mass unemployment occurs hasn’t changed as a result of globalisation. It still remains that if aggregate spending is not sufficient to purchase the total supply of goods and services, there will be an unplanned increase in inventories leading to a rise in unemployment and/or underemployment.

To avoid this situation, net government spending (the budget deficit) must fill the spending gap. So mass unemployment always reflects a choice made by government to provide lower net government spending and accept higher unemployment.

When involuntary unemployment exists, nominal (or real) wage cuts cannot “clear” the labour market unless they somehow eliminate the desire of the private sector to net save, and thereby increase its overall spending in the economy. That is, of-course, unlikely in the extreme. The opposite is highly probably.

Furthermore, individual search endeavour cannot eliminate the macroeconomic constraint imposed on the labour market. In other words, the unemployed cannot search for jobs that are not there.

Extending the model to include the foreign sector makes no fundamental difference to the analysis, because private domestic and foreign sectors can be consolidated into the non-government sector without loss of analytical insight.

Only government deficit spending can accommodate any net desire to save by the non-government sector and eliminate unemployment.

In contradiction to mainstream rhetoric, the systematic pursuit of government budget surpluses must be manifested as systematic declines in private sector savings.

Mass unemployment thus arises because the budget deficit is too small, whatever global forces are operating to shift the pattern of production between nations.

The non-government sector depends on government to provide funds for both its desired net savings, and for payment of taxes. To acquire the currency it needs, the private sector offers real goods and services for sale.

Unemployment therefore occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save. In general, given that the non-government sector desires to hold currency, deficit spending will be the norm if high levels of employment are to be maintained.

As long as the national government can enforce tax obligations in the currency it issues then these conclusions will hold. Globalisation might shift tax bases off-shore if government regulation permits. But ultimately, military invasions aside, the national government maintains the capacity to determine the regulative and policy environment that global businesses have to operate within.

Global businesses do not sell at some abstract global level – they sell to you and I in our local shops (predominantly – that is, notwithstanding the rising proportion of on-line shopping). Even as on-line shopping becomes more commonplace, the goods and services will still have to cross national borders.

Irrespective of globalisation, there are no financial constraints on a national, currency-issuing government spending.

This myth starts with a false analogy between household and government budgets. A household, the user of currency, must seek finance before they can spend, whereas the government, the issuer of the currency, spends first and never has to worry about financing.

Further, it still remains, no matter how integrated economies are globally, that the currency-issuing government’s spending provides the private sector with the currency they need to discharge their tax liabilities and to net save.

This spending precedes the tax payments and logically cannot be financed by the same. If the private sector desires to net save then total government spending must exceed taxation; therefore, there must be a budget deficit. Budget surpluses thus squeeze the desires of the private sector to hold financial assets, net save and pay taxes. Ultimately, they must lead to mass unemployment due to insufficient spending.

Ben Verwaayen then got into his stride and claimed that part of the problem at present is that people are being nostalgic for a past that is gone forever.

Larry Elliot expressed Verwaayen’s view as being that people should:

Shape up, embrace change, get with the globalisation programme: that was his answer to those angry at corporate excesses, job insecurity, offshoring and banks deemed too big to fail.

There is no doubt the globalisation has changed the pattern of our lives, the way we work, the products we consume, and the way we spend our recreation time.

As I noted above, globalisation has not undermined the fundamental facts that govern macroeconomic activity – that spending equals income equals output which drives employment growth.

There are only 3 broad sectors in the economy: (a) the private domestic sector; (b) the external sector; and (c) the government sector.

Each of those sectors contributes one way or another to aggregate demand. Domestic economic activity (real GDP) is determined by aggregate demand.

If spending from the private domestic sector and the external sector is insufficient to generate enough output consistent with full employment then there is only one other source of aggregate spending possible in any economy, no matter how open it is to the external sector.

All the supply chain developments, all the changes in labour mobility, all the changes in patterns of world production, all the new product innovations, do not alter these basic macroeconomic facts.

So when economic growth is flagging and private domestic spending is subdued and the external sector is draining growth in government deficits are the only way to boost economic activity.

Globalisation has not altered that reality.

There are some other macroeconomic realities are also important to consider.

1. Consumption will remain the most important component of aggregate demand, notwithstanding environmental concerns that would indicate we should reallocate the pattern of consumption towards “green” goods and services.

2. A reliance on credit-driven consumption is not sustainable overall.

3. To ensure that consumption growth is funded by wages growth, real wages have to grow in proportion to productivity growth.

A characteristic feature of the neo-liberal era has been the deliberate (policy-induced) widening of the gap between real wages growth (which was deliberately suppressed) and productivity growth. The only way that consumption growth was possible in this environment was through the expansion of credit. The rising indebtedness of the non-government sector was unsustainable and remains the crucial problem that has to be addressed.

This growth strategy, that suited the elites, has resulted in the current financial crisis. The redistribution of real income that resulted from this strategy also provided the financial markets with the “gambling chips”.

While it is anathema to neo-liberal ideology, governments have to ensure that that workers (and their unions) are empowered to gain greater access to real income in the form of faster real wages growth in line with productivity growth.

There is nothing nostalgic about citizens demanding that their elected governments stop acting in the interests of the elites and instead ensure that the policy environment they create is consistent with broad prosperity.

There is also nothing nostalgic about currency-issuing governments using their fiscal capacity to ensure that aggregate demand is sufficient to generate high levels of employment growth and broad provision of public goods.

Conclusion

In radio interviews (etc) that I give I stress the need for nations to return to the “new” normal. Households are now returning to their their previous behaviour – that is, they are now saving around 10 per cent of their disposable income (although this varies according to nations – for example, the ageing population in Japan will probably save less than that over time).

Given that every nation cannot run external surpluses (by definition) then this “new” normal will also require continuous budget deficits (of varying sizes relative to GDP) if nations are to achieve high levels of employment and stable growth.

These observations remain valid irrespective of the changes that globalisation might be responsible for.

“It seems that Davos is still keen to play host to anti-Democratic forces”

If only these so-called anti-democratic forces found some spare time to stroll throughout the rest Switzerland, they would find out how a real Democracy operates. Switzerland still has a sovereign currency (as Nobel-laureate James Buchanan observed referendums provide an “add on” to existing decision-making rules to prevent hare-brained schemes that brings disaster onto ordinary people – like the Euro debacle); it has comparatively low levels of unemployment while also having the lowest inflation rate than any other OECD country since 1889; it has high taxes on rent-seekers;* while preserving robust federalism which in turn keeps taxes low on capital and labour.

Neutrality could mean they treat both good and evil alike – in any event, if the purpose of a nation state is to protect the welfare of its own citizens, then better than being slaughtered by Germans and Italians – indeed, it has given us the Red Cross and many other noble organizations. Attempts by Switzerland’s small Nazi party to affect an Anschluss with Germany failed miserably, largely as a result of Switzerland’s multicultural heritage, strong sense of national identity, and long tradition of direct democracy and civil liberties. The Swiss shot down 11 Luftwaffe planes between 10 May 1940 and 17 June 1940. By the end of the war, there were over 115 000 refuge seeking people of all categories in Switzerland, representing the maximum number of refugees at any one time.

This is not to say Switzerland is perfect (for example, citing spurious reasons relating to dwindling supply some refugees were refused entry) – but I’d still be happy to compare Swiss liberties compared to any other Western country, especially the Americans, the British and German with the concentration camps, or to the Vichy French.

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* high capital gains taxes and surcharges on properties sold after short ownership periods (<5-10 years); properties are subject to both a wealth tax and an imputed rent tax; 20% deposit requirement for owner-occupiers, more for investment or holiday homes; mortgage and other costs for owning the property usually cannot be more than 33% of your income

“There are increasing calls for more government assistance to save the jobs as a nationalistic gesture – we are constantly being told that Australia needs a manufacturing sector”.

Also, the Swiss National Bank had the balls to intervene in their currency market to keep jobs in manufacturing steady. It is curious that we did not do the same – indeed, our manufacturing sector has no “Veblen goods” – if the Swiss currency appreciates, then the overall demand for their goods will be steady due to their niche, specialized market (Rolex’s, physics equipment, pharmaceuticals, high-quality chocolates). In Australia, as “Made in Australia” does not invoke the precision, expertise and quality of “Made in Switzerland”, a high dollar would in the long-run decimate our manufacturing base. Once we run out of minerals and the property bubbles, stop we’d even have more reason to fly that patriotic flag!

This is actually one of the best posts I’ve read recently as it explains the true intentions of Mrs Merkel and the “new paradigm”. I have realised that it is naive and simplistic to think about the unified Europe as just another incarnation of Mitteleuropa or Prussian Germany. It is more about destroying the national states and moving back the political structure to what was common in 18th century. Economic and fiscal sovereignty have to go as well. The power is to be transferred from the state governments to the central institutions of the EU and the bureaucracy aided by the cast of lawyers and anonymous “experts” without faces. The real class of overlords ruling the continent is and will be the cosmopolitan North European plutocracy. The EU protectorate of Greece, Bosnia-Herzegovina or even worse – illegally declared as a state Kosovo look like the champions of the new order. In that context the bizarre proposal of the dissolution of the United Kingdom looks like a revenge of the Eurocrats for opting out from the austerity union proposed several weeks ago.

What I think may happen is that atomised and brainwashed masses won’t be able to organise themselves. The margin is far greater than in 1933. As long as the unemployed people can afford to watch TV, exchange gossips about celebrities on Facebook, eat toxic fast-food and drink some cheap alcohol there will be no resistance even if unemployment exceeds 20 or 30%. The Unified Europe runs on “panem et circenses”. There was too little TV and computer games in 1933 that’s why people elected the great entertainer with a fancy moustache who ended up murdering so many millions of people. Now the same quality grade entertainment costs a few dollars or it is for free on the Internet. The European oligarchs are safe now and the cynical game of brinkmanship can continue for a few more years. I would not underestimate however the blind hatred towards the greedy “elites” growing among excluded and alienated young people (once told that “greed and overconsumption are good” but then even denied any chances to find a job) which can one day explode as either another truly fascist movement or just acts of vicious destruction of any symbols of power like the latest demonstrations and riots in Poland against signing the ACTA accord on “intellectual property”. Rioting or more serious acts of violence are a normal response to ultimate cynicism, neoliberal lying combined with the political correctness of the New Labour and absolute lack of respect to ordinary people. Since virtually all the ideas of positive dissent has been thoroughly eliminated by very thorough brainwashing and there is no relevant public debate any more, the only “rational” option for anyone who wants to change the course of history is insane and criminal mass violence as demonstrated by Breivik. I am almost done with this topic and I may opt-out again from any interest in politics for another 20 years. I think that I have learned enough about how much of what we see and hear in the media is based on plain lies – but the masses like to hear these lies and call the virtual world a “democracy”.

Benedict, I’m just saying there’s been a debate recently over the internet on whether government debt can be a burden on future generations (Nick Rowe, Bob Murphy) or not (Krugman, Baker). And I’ve seen little input from MMTers except from some commenters of MMT blogs. So Bill’s take on the topic would be interesting I think, although I know he doesn’t write his blog on demand.

The fight to get the world to accept MMT will be a long one, but the truth always outs. Unfortunately, elements of the left in America are resistant to any new economic perspectives that don’t mesh well with the teachings of Paul Krugman.

Bill,
It appears some 500+ million workers have joined the world’s workforce in the last decade. If so how does UK or Australia ensure full employment when resources are limited but demand/marketing of an American lifestyle is an aspiration for many countries?

I don’t get why do workers’ wages have to keep up with production? Their demand can be replaced with capitalists’ profits. The economy structure changes – more goods are produced that are aimed at the rich, but as a whole the economy can still afford to consume what it produces. I am not saying this development is good, but it seems sustainable in the economic sense, and no credit growth is needed, workers simply consume less and the rich more.

Benedict@Large – I agree with you. However, there is the “crowding out” hypothesis. I keep my savings in a fixed-interest fund, which largely re-invests in sovereign debt (with some corporate bonds), and so should anyone with less than, say, $100,000 to invest, or who needs the income for day-to-day living expenses. Of course, this in theory is so much less capital available for entrepreneurs to borrow – or spivs to steal. I suspect the latter group have a lot of friends in the media.

The statement I made was that workers’ real wages have to keep up with labour productivity – which means that consumption growth can be funded from wages and not rely on ever-increasing growth in credit (and thus indebtedness).

It is true that demand could be maintained if the increased profits found their way back into the spending stream. But that would require a major shift in behaviour of the type we have never seen before. So highly unlikely.

I prefer to consider likelihoods that are ground in behavioural regularities.

Well, I have some doubts about the statements made in this thesis. The major aspect missing is the role played by the total debt in a country. Of course, we can delay the liquidation of malinvestments by increasing the money supply for a certain period but I doubt it to be feasible in the longer term. Excessive Debt makes everything move slower and harder and is the source of risk aversion and insecurity. By simply papering over such needed cleaning of the system, we would not only violate the rules of free markets but more importantly we would undermine the principle of the rule of law in various ways. If there are no more rules, we arrive at the crony capitalistic system we presently are faced with.

Anybody who says that public debt is a burden on future generations due to unavoidable tax increases has to make a reference to the exact page in the tax code and be clear about which tax will be increased. There is no such thing as “taxes will increase”. Taxes, even if the whole theoretical claim is true, are never increased proportionally, even if that was possible at all. Some taxes can increase and some can fall. So once again the whole discussion about burden is just theoretizing in the blue sky about something which does not exist in the real world. If blue sky dreamers insist then I would refer them to the capital gains tax which can surely increase, especially in the part which talks about interest income on government bonds.

However, public debt is definitely a burden if it destroys or holds back the productive capacity of the economy. Which advocates of burden too often than not would like to impose of the economy.

“I have some doubts about the statements made in this thesis. The major aspect missing is the role played by the total debt in a country. Of course, we can delay the liquidation of malinvestments by increasing the money supply for a certain period but I doubt it to be feasible in the longer term. Excessive Debt makes everything move slower and harder and is the source of risk aversion and insecurity. By simply papering over such needed cleaning of the system, we would not only violate the rules of free markets but more importantly we would undermine the principle of the rule of law in various ways.”

When the state sends $1 trillion directly to Goldman Sachs or when it sends the same amount to a 100 million households, the net numerical effect on the private sector as a whole is the same: $1 trillion coming in. But the economic effect cannot be, of course, the same in both cases. (Bill Mitchell has written repeatedly abt research on the difference between what effect $1 going into the pockets of the less well-off has on the economy vs the effect of that $1 going into the pockets of the better off.)
In so many words, if the economy’s woes must be addressed by the state pumping $1 trillion into it, e.g. to decrease unemployment, we should do it even though there might be an indirect benefit to the Goldman Sachs of this world. And, of course, the state cannot be blindly handing out money – which is why the expression “helicopter money” gives a false perspective: you cannot accurately hit your target from above when hovering in a helicopter! The state should direct its spending wisely, e.g. it should avoid directly rewarding firms for malinvestments. (And even that is not a golden rule.)
If, as is the case with aspects of taxation, the society as a whole overwhelmingly benefits from certain measures, we should not be quibbling abt temporary and exceptional benefits to a few undeserving souls. This is actually the reverse of the mainstream credo which recommends punishing the many to benefit the few.
Cheers.

“we should not be quibbling abt temporary and exceptional benefits to a few undeserving souls”

Well, crony capitalism certainly guarantees benefits to all those undeserving souls on an ongoing basis while the FED’s policy to artificially keep interest rates low shows who in actuality is paying for those benefits, namely the simple saver who cannot achieve a reasonable return on his safe investments anymore while all those banks and speculators reap undeserving benefits until the whole mess crashes again for society as a whole to be there to save it. I do not subscribe to such manipulation as done by central banks the world over but find them rather an crime that should be punishable.

To separate the risk from the investment and transfer its cost to the average joe is not simply a moral hazard but represents the largest theft of all times. To have hardly anybody persecuted over these activities shows how corrupted the law presently is. Looking back at the S&L crisis, we can see a major shift that allows the elite to reap benefits without facing the risk of a jail term when acting against the spirit of the rule of law.

How is it unsustainable? If there’s people willing to donate to consumers, and there always should be some, this is sustainable. The state could even feed it some more, and that’s sustainable as well, you just reset the debts from time to time. And this tends to send money towards the poorer, so it’s redistributive as well. All good.

the FED’s policy to artificially keep interest rates low shows who in actuality is paying for those benefits, namely the simple saver who cannot achieve a reasonable return on his safe investments anymore while all those banks and speculators reap undeserving benefits until the whole mess crashes again for society as a whole to be there to save it.
Regular people get returns based on the FED/ECB/whatever rate, which is getting lower and lower, but regular people also pay loans based on that very same rate.

The state could even feed it some more, and that’s sustainable as well, you just reset the debts from time to time.
This was how it was done, much time ago. Debts would be reset from time to time. If that would occur, then it’s sustainable for debt would only be able to grow so much, but who would want to lend?

Regular people get returns based on the FED/ECB/whatever rate, which is getting lower and lower, but regular people also pay loans based on that very same rate.

Yes, it simply transfers money from creditors to debtors in effect but does not allow for the market to price risk correctly which in turn creates new bubbles and we should all know by now, bubbles will at one point burst. Presently we experience the bubble in government debts. I do not subscribe to the notion that the costs of real risks and its price can be made to disappear but it simply turns up as a cost somewhere else. At one point in the future, the market will enforce the price of risk again and the reset as you describe above will happen. When you state that the growth of debt is sustainable under the condition of resets from time to time is rather a joke, hey. The reset is basically a write off or creative destruction and confirms the unsustainability and ponzi scheme characteristic of the present situation.

When you state that the growth of debt is sustainable under the condition of resets from time to time is rather a joke, hey. The reset is basically a write off or creative destruction and confirms the unsustainability and ponzi scheme characteristic of the present situation.
When I spoke of a reset, I spoke of a legal one, like a norm that says that all debts are reset in X occasion or after Y time.

Still, that means in other words, the sustainability is given when there exists a reset which we do not have at this point in time. So the markets will enforce a reset which is simply a messy affair as it destroys perceived wealth that was not backed by real assets.

Anyway, the need for resets confirms the unsustainability of the present course of action by those presently still in charge. In economic terms it is rather unimportant whether a “reset” is done in a legal way or not. As you stated further above “but who would want to lend” under such circumstances which confirms another aspect, namely the fact that the risk is mis-priced due to the manipulations by Central Banks.

Cig – To the extent that consumption is driven by “people willing to donate to consumers” (wish someone would introduce me to these nice people) , the state feeding consumption, resetting debt & redistributing, it is not relying on credit. That’s the point. Only by relying on these sustainable things, can private credit-based consumption, and economies based on them, be sustained without defaults.

Linus: Governments & their central banks keep interest rates artificially high, above the natural risk-free short term rate of zero, by selling bonds, by paying interest on reserves. They are the only ones who could offer a positive risk-free rate, the only ones with infinitely deep pockets.

You are right about the Ponzi scheme possibilities & nature of private credit as above, but not concerning government debt or bubbles on it. That’s like saying the metric system is an unsustainable Ponzi scheme or a bubble. (Where do they get all those meters & kilograms from? Sure, it’s a Commie conspiracy to pollute our bodily fluids, but a Ponzi scheme? :-))

Speculative bubbles don’t really have so much to do with risk-free rates and central bank manipulation by lowering them, low rates usually being a Good Thing. But with bad design & laxness of bank regulation & oversight & capital requirements, and too much animal spirits. The 1980s USA had nice bubbles & high interest rates.

You assign the adjective risk free to short term government bonds but ignore the aspect of inflation. In addition, how do you qualify the interest rates of e.g. Greece, their one year rates are probably 50% or whatever; so risk is shown in the rates very obviously. The interest rates for Greece were obviously too low since the introduction of the EURO as every banker should have known that their fiscal discipline is rather weak.
It is correct that government bonds are kind of risk free in the sense that a government can simply “print” additional currency at any rate, therefore default is kind of impossible due to their indefinitely deep pockets as you state. BUT only as long as confidence in the currency’s value remains stable. Once confidence in a currency’s value collapses, the game is over. Of course, presently all central banks are inflating their balance sheets so the US$ may look best of the whole ugly bunch. But if you measure the value of currencies in terms of real money (Gold) you can certainly recognise how much they lost in value over the past 10 years. The present monetary policies applied to avoid required write offs is not a positive in my eyes but should be criminalised and those responsible be persecuted.
With reference to bubbles of the 80ies, well, I see a major difference to today. At that time those bubbles were first never that encompassing and large and secondly they were allowed to be deflated and the investors took their losses generally. Also when looking at the S&L crisis you will see how many of those responsible were charged and persecuted while today, hardly anyone was made responsible.
Low rates DO spur bubbles and promote bad behaviour as mal investments are not written off and those responsible are allowed to reap the system on the account of the average system. Had Greenspan not provided those low rates, we would never have experience the housing bubble to this extent. And if you really analyse it, the Government debt bubble is also a result of low rates. Having an economy without the required cleaning from time to time, is like having heaven without hell. It simply does not work and I am certain you will experience the result of those reckless monetary policies within your life time. The presently used economic models give much too little weight to the overall level of debt within a country (private, government, business, finance) and are not able to fathom an environment where we may have negative growth. Any model that is unable to stay viable during a major contraction is an unsustainable model.